California Court Decision May Hurt Insurers NAIC Told

California Court Decision May Hurt Insurers NAIC Told

NU Online News Service, June 16, 1:11 p.m. EDT, San Francisco?Participants at a regulators meeting here said a recent ruling by the California Appeals Court, that potentially challenges the regulators' authority and the validity of rate filings, could be costly and unsettling for the insurance industry.[@@]

A discussion of the case became the top issue during a litigation working group session at the National Association of Insurance Commissioners summer meeting.

Titled Donabedian v. Mercury, the case involved a suit by Sam Donabedian, a private ciizen who argued that under California's Proposition 103, it was illegal for Los Angeles-based Mercury Insurance Company to use a prior insurance record as part of its underwriting and pricing practices.

Mercury Insurance in its defense said its rates had been approved by the insurance commissioner, who has exclusive jurisdiction over ratemaking. The trial court agreed with Mercury and granted the company's motion for a finding there were no grounds for legal action.

The California Court of Appeals reversed the trial court's ruling on March 11, saying that the Department of Insurance rate approval did not preclude Donabedian from pursuing his lawsuit against Mercury for violating a section of Proposition 103.

The Court of Appeals pointed out in its ruling that the California insurance department actually did not rule on the case even though it was entitled to do so and that the department is even supporting the position that courts should be allowed the authority to rule on the case.

And the appeals court also noted that, under the state's Proposition 103, California citizens have the right to directly sue any insurance company if they disagree with the company's rates, rules, or underwriting plans that have been approved by California insurance department. The citizen's right to sue overrides, according to the court, the exclusive authority of the insurance department to make a ruling.

Judging from the tone of speakers at the working group session, the California decision is a rattling one for insurance executives and regulators alike.

Washington, D.C., Commissioner Larry Mirel told the Class Action Insurance Litigation Working Group the decision "raises a lot of issues."

"Obviously it's very unsettling for the insurance industry to think that rates that have been filed and used are going to be challenged at some later date by litigation. Clearly it adds uncertainty in the market," Mr. Mirel commented.

"This is a very illustrative case, it seems to me, for the kind of issue we are trying to wrestle with here," Mr. Mirel said. He said the decision brings up "the question of, what should be the relationship between the regulatory authority and the courts?"

Tracey Sandin, assistant vice president of government affairs at the 21st Century Insurance Group, based in Woodland Hills, Calif., giving what she described as an industry perspective, said she hoped the California Supreme Court would review the issue, but as a result of the decision, "you could be looking at an onslaught of actions against the industry. Just bringing those actions is going to cost us dearly."

A representative from a national trade association also voiced concern. "The ruling of the California Court of Appeals could make every trial court in California an additional regulator," said Robert Zeman, senior vice president of industry and regulatory affairs at the Property Casualty Insurers Association of America, based in Des Plaines, Ill.

That outcome, he said, would be terrible public policy, "not only for insurance companies and regulators, but for policyholders as well."